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The Vanguard S&P 500 ETF (NYSEMKT: VOO) is one of the market's most popular exchange-traded funds (ETFs). It tracks the S&P 500 (SNPINDEX: ^GSPC) market index with pinpoint precision and minimal fees. If you haven't bought your first stock or fund yet, this Vanguard ETF may be the only investment you'll ever need.
Then again, maybe you can do even better with a different index fund from Vanguard. One popular option is the Vanguard Information Technology ETF (NYSEMKT: VGT) -- another simple index fund focused on stocks in the tech sector. Launched in January 2004, this ETF's market history is six years longer than the Vanguard S&P 500 ETF's, and the returns are pretty impressive.
Can this fund make you a millionaire, and what would it take to reach that investing pinnacle? Let's have a look.
A tale of two Vanguard ETFs
First, let's see how the IT ETF has fared against the basic S&P 500 index in the long run:
The fund has delivered a 1,420% total return since inception. That's more than double the broader market's 692% gain over the same period.
However, this ETF did not double the average annual returns of the S&P 500. Thanks to the mathematical magic of compound returns, the annual return difference was just 14.6% versus 10.9%. Keep that yearly advantage up for two decades and you'll double the returns of the slower fund. Add another decade, assuming the same long-term return rates, and you'd see a 167% outperformance in the end. The outperformance only grows larger over time, as long as the two funds can deliver consistent returns.
Small advantages per year can grow to game-changing investment results in the long run. The Vanguard IT fund has provided enough of a bonus gain to change the calculation for investors who want a million-dollar nest egg someday.
How much money do you need to invest, you future millionaire?
You've seen the IT ETF's average performance over the long haul. How much would you need to invest to have a million after 20 years? With a compound average growth rate of 14.6%, a $70,000 starting investment hits the mark, growing into approximately $1.07 million in three decades.
The earlier you start investing, the smaller you can start. If you bought some Vanguard IT ETF shares 30 years before retirement, you could make a million dollars from a nest egg of roughly $18,000. And if you're a 20-year-old Wall Street whippersnapper with at least 40 years to go before retirement, you'd only need $4,500 in seed money.
So, the math checks out -- you can definitely make a million dollars with the Vanguard IT ETF, given a modest starting investment and a long enough time period. You'll get there even faster by adding more funds along the way -- and don't forget to reinvest dividends in more shares. Your journey to $1,000,000 will slow down dramatically without the dividend reinvestment program (DRIP). Remember, small annual differences add up quickly when you multiply them over and over.